1099 Risk Blog

Contractor Classification Tip #2

Here's our independent contractor classification tip #2:

Get Expert Guidance. 

Use a third-party compliance firm that is current with the complex regulations and risk factors. Select a firm that has extensive experience in compliance and that will indemnify you from tax reclassification risk if the contractor is reclassified. If you assess compliance in-house, seek the expert advice of an experienced law firm to ensure that your program is in line with the most up-to-date case law and court sentiment. 

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Contractor Classification Tip #1

With the new year afoot, MBO Partners would like to offer you our quick series of essential tips for proper independent contractor classification. Here's our first tip, as we've found a contractor compliance program is only effective to the degree you actually run compliance on anyone who might be subject to reclassification.

Tip #1:

Run compliance on all incumbent and new contractors. 

Even small corporate entities of one or a few employees could be subject to reclassification. Compliance must therefore be run on all your 1099s, including self-incorporated consultants and small Statement of Work (SOW) vendors or project teams. To minimize the business disruption, consider a phased approach starting with new contractors, and once that part of the program is under control, begin to run compliance on your incumbent contractors with each new work order or contract renewal.

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IC Classification Essentials

As the year coasts to a close, it's always a good time to review the Essentials of IC Classification. How to tell if a professional worker is an employee or a contractor? Remember, that decision is not up to you -- it's decided by the realities of the working relationship, and enforced by the IRS. To get ready for 2009, this blog is going to offer up a not-to-be-missed series of Independent Contractor Classification Tips for HR, Procurement, and Contingent Workforce Program Managers. But to lay a little groundwork before we do, here are the basics on what distinguishes Employees versus Contractors.

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Wrestlers Misclassified?

In our news of the weird for today, as reported by the Connecticut Law Tribune, attorneys for three wrestlers have filed a federal "legal smackdown" against the WWE for misclassifying the performers in independent contractor status, and denying them employee benefits. While seemingly absurd, the lawsuit is yet one more example of increased awareness around the issue of employee misclassification, and raises serious questions of Federal tax evasion. Beyond all that, as a writer for the Advocate quipped, "When you get hit in the face with metal chairs for a living, it's a good idea to have a dental plan."

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Latest E-Verify Legal Research

The latest legal update on E-Verify compliance for government contractors is now available. Jointly produced by Michael Best & Friedrich LLP and MBO, E-Verify Requirements for Contractors offers a groundbreaking preview of the shape of new regulations to come. In June, Bush signed an Executive Order mandating E-Verify I-9 checks for persons working on government contracts -- both new and existing workers. E-Verify raises sticky issues when it comes to sub-contractors, small vendors, and independent consultants performing work for federal contractors. Even more attention-getting is the risk of getting it wrong -- failure to comply can lead to penalties ranging from fines to debarment from federal contracting. As was revealed at our briefing on Friday, your E-Verify program is only as good as your contractor classification. If you're exposed to contractor reclassification risk, then for every misclassified contractor, you have a de facto employee working on a government contract who you have not E-Verified. But don't take my word for it -- check out the paper, run your own research, and send our your comments and feedback.

Stay tuned for the most up to date info regarding E-Verify. The comment period is closed, and detailed instruction is expected to be released as soon as November.

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MBO Hosts E-Verify Compliance Briefing

MBO to host executive briefing with leading contractor risk attorney Eric Rumbaugh from Michael Best LLP on E-Verify for Contractors this Friday August 15th. The meeting is now fully booked. To get on the waiting list or receive a copy of the White Paper, please contact us.

E-Verify is an online system that allows employers to check the work status of new hires by comparing information from an employee's Form I-9 against Social Security Administration and Department of Homeland Security databases.  Although initially a voluntary program, as a result of a Presidential Executive Order signed in June, all federal contractors will be required to use the system.

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MBO Sponsors HCI Government Forum

MBO Partners has been announced as one of four sponsors -- along with Booz Allen Hamilton, IBM, and Vangent -- for the first annual HCI Government Talent Forum. The conference will take place on September 17th, 2008 and will provide strategic thought leadership in human capital management for government agencies. Keynote speakers at the event include Paul Light, NYU Professor of Public Policy, and Congressman James Moran, 8th Congressional District of Virginia.

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States Adopt E-Verify

On July 7th, Missouri joined several other states like Colorado, Georgia, Rhode Island, Utah, and Oklahoma in requiring all state contractors to enroll in E-Verify. E-Verify is an online system administered by the Department of Homeland Security and the Social Security Administration whereby employers can verify employment eligibility of workers and vett their documents electronically.

Marketed by DHS as an essential tool for employers to ensure they employ only legal workers, the program is voluntary for most employers but required for Federal contractors -- including independent contractors and small services vendors hired to perform work for government agencies. With the states getting in on the act, compulsory enrollment will continue to grow.

Some critics of the program have asserted that there must be funds budgeted to improve the accuracy of the Social Security Administration's record systems, and that the program should be rolled out in phases. Others have pointed out privacy issues as a concern.

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Technologies Reconcile State & Federal Tax Returns

Today's news feed reveals that the state of Rhode Island is getting serious about recouping its tax gap -- that difference between the taxes collected and the taxes owed. New technology and the innovation available through a public-private partnership are enabling Rhode Island to feed IRS federal tax data into a data warehouse along with state tax return records, and then mine that data to look for discrepancies.

RI expects to recover around $10 million in uncollected taxes, targeted at independent consultants, contractors, and small businesses.  

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Michigan and Maryland Eye Misclassification

Michigan and Maryland are joining other states in bringing increased scrutiny at the local level toward the classification of workers as either contractors or employees. The employee misclassification debate is now heating up across the country, with most agencies now labeling misclassification as a pervasive form of tax evasion.

2008 is the year for businesses to come to terms with the fact that agencies at every level -- local, state, and federal -- are looking to recoup lost payroll tax revenue. They are awake, they are sharing information, and they are considering it well worth their effort to go after it.

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